REGIONAL INTEGRATION IN SOUTH-EASTERN EUROPE Introduction

REGIONAL INTEGRATION IN SOUTH-EASTERN EUROPE DIMITRIOS KYRKILIS University of Macedonia, Greece and Black Sea Trade and Development Bank 1 EVANGELOS NIKOLAIDIS University of Crete, Greece

Introduction Although, the ex-communist countries in the region of South-Eastern Europe 2 are entering the second decade of transition to a market led economy, economic growth in the region is not sustainable yet (see World Bank, 2000). Besides, ethnic and political fragmentations persist deteriorating further the economic potential of the region. As it is presented in Table 1, the rate of economic growth was negative or very slow in the 1990’s and it started picking up only towards the end of the decade. In 1999 the GDP level of the transition countries of the region accounted for the 75 percent of the pretransition (1989) level, in average. Only Slovenia succeeded in recovering its real GDP at the 1989 level. Unfavourable initial conditions have combined with conflict, uneven implementation of reform programs, inconsistent macroeconomic stabilisation policies, lack of tradition in institutional development, large debt burdens, unbalanced industrial structures, great distance to western European markets and inadequate transport links to yield poor economic performance and made transition a difficult exercise for the region. Table 1. Growth Rates in South-Eastern Europe Real GDP Growth Rates, (%) Countries Albania Bosnia-Herzegovina Bulgaria Croatia FR Yugoslavia FYROM Greece Romania Slovenia Turkey

1990-1998* -0.8 29.9** -4.0 -2.4 n.a -1.2 2.0 -2.9 0.5 4.9

1999 7.3 12.0 2.4 -0.3 -19.3 2.7 3.4 -3.2 4.9 -5.1

2000 7.0 n.a 4.0 3.5 n.a 5.0 4.1 1.5 5.1 6.0

Estimated level of real GDP in 1999 1989=100 95 95 67 78 41 74 n.a 76 109 n.a

Source: EBRD: Transition Report, 2000; EIU: Country Reports, Various Years Notes: (*) Annual Average (**) 1995-1999

A deeper and more consistent implementation of domestic reform programmes along industrial restructuring, technological upgrading, building of infrastructure, and accelerated investment activity present the necessary and sufficient condition for fostering sustainable growth in the region. All these require internal and external economies of scale. Most of the countries are small in terms of 1

Views expressed in this paper are personal and not in any way engage the BSTDB. In the context of the current paper the region of South-Eastern Europe includes: Albania, Bosnia-Herzegovina, Bulgaria, Croatia, Federal Republic of Yugoslavia, FYROM, Greece, Romania, Slovenia, and Turkey. 2

population3 and market size. Market fragmentation may give rise to non-competitive structures and inefficient solutions, which may have negative welfare effects; and it may also set a limit to the agglomeration economies, the potential of which is one of the most critical prerequisites for industrial restructuring and investment. In that respect the sufficient condition for sustainable growth would be the overcoming of the market fragmentation. Regional co-operation and integration could be the decisive factor towards unifying individual markets in the area. Regional integration in the South-Eastern Europe could create an enhanced market quite homogeneous in some respects, e.g. consumer preferences, production structures, etc.; equally diverse in some others, e.g. natural and created resources, geographic position, relationships with third regions. For instance, Greece is a member of the Euro-zone while Romania and Bulgaria have a better understanding of the Russian Federation, for historical reasons, and Turkey a better access to the new states of Central Caucasus because of cultural ties. This market would be relatively easily accessible due to geographic proximity, which would lower transportation and marketing costs. Ultimately, it would, first, increase cross-border transactions, i.e. international trade, foreign direct investment (FDI), and business networks; second, it would facilitate the establishment of economies of scale and scope; and, third, it would help industrial restructuring, competition and efficiency. Overall, it would create the potential for growth through the creation of conditions favourable for investment4 . The aim of the current paper is to explore the present situation with respect to regional integration in South-Eastern Europe. In particular it addresses the issue of trade relations among the countries in the region, in terms of volume and direction as opposed to trade relations between these countries and the EU. The latter appears as the main trading partner at present, and that poses a critical question rela ted to the welfare effects of such a situation.

Some Stylised Facts The volume of international trade of the South-Eastern Europe has been increasing since 1987, (see Table 2), although the trend was disrupted by the initial transition shock in 1990, 1991 and the ethnic and political disputes between and within countries in the region. 5 The distribution of individual country shares to the total regional international trade is quite asymmetrical ranging from 39.6 percent for Turkey to the extremely low 0.7 percent for Albania (see Table 3). There is a significant concentration with Turkey and Greece accounting for over 60.0 percent of the total trade of the region in 1999 compared with 63.4 percent in 1993 and 46.0 percent in 1987. It should be noted that before the break up of Yugoslavia, the latter had a significant share in the regional trade equal to 24.8 percent of the total. This percentage stands above the cumulative share of all the countries that emerged after the break-up of Yugosla via, which was 21 percent in 1993, and increased slightly to 23 percent in 1999. This increase was mainly due to the increase of the individual shares of the Republic of Yugoslavia and Bosnia -Herzegovina in the same period.

3

Of the transition countries of South-Eastern Europe only Romania has a population of 22.3 million. The population size for the other countries ranges from 8 million for Bulgaria to 2 million for FYROM and Slovenia. The source of data is EBRD, 2000 and it refers to mid 2000. 4 On the benefits of regional integration see Gros, 1999. 5 The Cosovo crisis in 1999 is a good case in point.

2

Table 2. Direction of SE European International Trade by Region, Inter-temporal Evolution, 1987=100 SE EUROPE 100.0 102.2 120.5 118.3 114.8 124.7 204.2 239.8 308.5 339.6 353.1 349.3 342.2

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

EU 100.0 100.3 113.7 147.5 152.9 158.9 162.5 171.2 232.5 250.1 261.0 271.3 255.3

WORLD-R 100.0 104.5 108.4 107.3 90.7 90.5 85.2 83.8 104.5 114.6 123.9 118.1 107.2

WORLD-T 100.0 102.8 111.0 123.2 115.7 118.3 120.3 124.5 163.0 177.0 187.1 187.5 174.8

Source: IMF, Direction of Trade Statistics. Own calculations

Figure 1. Distribution of SE European International Trade by Region, in percentage terms 70

60

50

(%)

40

30 S-E EUROPE

20

EU WORLD-R

10

0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Table 3. Total International Trade of SE Europe by Country of Origin 1987

1993

USD % USD Millions Millions Albania 0 0.0 726 Bosnia & Herzegovina 0 0.0 509 Bulgaria 7789 8.0 6744 Croatia 0 0.0 8570 Greece 19701 20.3 29293 FYROM 0 0.0 2254 Romania 20666 21.3 12626 Slovenia 0 0.0 13107 Turkey 24893 25.6 44703 Republic of Yugoslavia 24028* 24.8* 95 Total 97077 100.0 116822 Source: IMF, Direction of Trade Statistics. Own calculations Notes: (*) The figures refer to the united former Yugoslavia

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1999 % 0.6 0.4 5.8 7.3 25.1 1.9 10.8 11.2 38.3 0.1 100.0

USD Millions 1174 3135 8917 11950 35248 2988 17790 18394 67274 2861 169731

% 0.7 1.8 5.3 7.0 20.8 1.8 10.5 10.8 39.6 1.7 100.0

The importance of the EU as an export market for the whole region has been constantly increasing since 1987. The trend became more potent from 1990 onwards, making the EU the main trading partner of the region. That coincides with the transition towards a market economic regime most countries of the region are going through and it is has been achieved at the expense of trade transactions with the former Soviet Union, (see Table 4). In particular, the EU’s share in the total South-Eastern European trade was 38.4 percent in 1987 and became 56.0 percent in 1999. On the contrary, the share of the rest of the world 6 decreased substantially to 35.0 percent in 1999 from 57.0 percent in 1987. The intra-regional trade, i.e. trade among the South-Eastern European countries, doubled its share to the total trade of the region from 4.6 percent in 1987 to 9.0 percent in 1999. This might indicate that some regional trade integration has been under-way, although this tendency seems very weak, as the low share of intra-regional trade with respect to the total declares. The latter remains very low throughout the whole period. Table 4. Direction of SE European International Trade by Region, in Absolute and Percentage terms SE EUROPE EU WORLD-R USD % USD % USD % Millions Millions Millions 1987 4469 4.6 37242 38.4 55366 57 1988 4569 4.6 37344 37.4 57881 58 1989 5387 5 42358 39.3 60025 55.7 1990 5288 4.4 54930 45.9 59422 49.7 1991 5131 4.6 56942 50.7 50229 44.7 1992 5573 4.9 59187 51.5 50091 43.6 1993 9127 7.8 60528 51.8 47167 40.4 1994 10718 8.9 63742 52.7 46387 38.4 1995 13789 8.7 86594 54.7 57845 36.6 1996 15175 8.8 93151 54.2 63460 36.9 1997 15782 8.7 97203 53.5 68621 37.8 1998 15609 8.6 101038 55.5 65406 35.9 1999 15291 9 95089 56 59351 35 Source: IMF, Direction of Trade Statistics. Own calculations

WORLD-T USD % Millions 97077 100 99794 100 107770 100 119640 100 112302 100 114851 100 116822 100 120847 100 158228 100 171786 100 181606 100 182053 100 169731 100

Figure 2. International trade of SE Europe, total and by region, in USB millions 200000 180000 160000

Millions of USD

140000 120000 100000 80000

S-E EUROPE EU

60000

WORLD-R 40000

WORLD-T

20000 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

6

That is total international trade minus the trade with the EU minus the intra-regional trade.

4

Figure 3. Direction of trade by region, intertemporal evolution, 1987=100 400 350 300

(%)

250

S-E EUROPE EU

200

WORLD-R WORLD-T

150 100 50 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

However, the intra-regional trade increased more rapidly than the total trade or even the trade between the region and the EU, (see Table 2). More specifically, total trade increased by 74.8 percent between 1987 and 19997 while the trade with the EU by 155.3 percent, and the intra-regional one by 242.2 percent in the same period. The increasing ratio of intra-regional trade over trade between the South-Eastern Europe and the EU, (see Table 5) present some further indication of enhancing regional trade integration during the transition period as opposed to integration between the region and the EU. The ratio had a value equal to 16.1 percent in 1999 compared to 12.0 percent in 1987. Nevertheless, it seems that this increase during the years 1993 and 1994, and the ratio remained rather constant afterwards. Table 5. Intra South-Eastern European Trade vs. Trade with the EU 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

S-E Europe (E+I) / EU (E+I) 12.0 12.2 12.7 9.6 9.0 9.4 15.1 16.8 15.9 16.3 16.2 15.4 16.1

S-E Europe (E+I) / WORLD-T (E+I) 4.6 4.6 5.0 4.4 4.6 4.9 7.8 8.9 8.7 8.8 8.7 8.6 9.0


In 1987 Bulgaria, Romania and the former Yugoslavia accounted for almost 70 percent of the intraSouth-Eastern trade, while Turkey and Greece for 15.2 and 13.4 percent respectively (see Table 6). In 1999 Turkey and Greece still account for 30.5 percent of the intra-regional trade, but Bulgaria and Romania diminished their shares from 20.1 and 26.3 percent to 12.1 and 8.8 percent respectively. Croatia and Slovenia accounted for another 26.5 percent. Concentration seems to have been lowered, i.e. four countries undertake the 51.0 percent of intra-regional trade. If the shares of the countries that emerged after the break-up of former Yugoslavia, namely Slovenia, Croatia, Bosnia -Herzegovina, 7

The total trade increased by 87.5 percent if 1998 is considered as the end of the period since trade performance in 1999 was seriously affected by the Cosovo crisis.

5

FYROM and the Republic of Yugoslavia are taken cumulatively, they make-up the 46.4 percent of the intra-regional trade, a much higher percentage than the share of former Yugoslavia, even if this is considered at its highest value, i.e. 28.0 percent in 1990. Most of the intra-regional trade, above 80.0 percent of the newly emerged countries of the region is undertaken between themselves8 . In that respect it cannot be considered as genuine intra-regional trade but rather as an enhancement of already existing trade linkages between the countries of former Yugoslavia, (see Table 8). Table 6. Distribution of intra SE European Trade by Country of Origin, in percentage terms ALB

B. & H.

BULG

CRO

GR

1987 1988

3 2.6

0 0

20.1 19

0 0

15.2 14.9

0 0

26.3 24.4

0 0

13.4 14.4

22* 24.6*

S-E EUROPE TOTAL 100 100

1989 1990

2.7 2.5

0 0

16.4 15.1

0 0

17 19

0 0

20.7 19.1

0 0

16.7 16.2

26.5* 28.0*

100 100

1991 1992

1.8 2.3

0 0

18.6 20.3

0 0

19.2 17.7

0 0

15.6 21.6

0 0

18.1 19.7

26.7* 18.4*

100 100

1993 1994

2.5 3.4

3 4

14 16.9

18.4 16.6

13.2 15.1

7.1 9.9

9.5 7.9

19.3 14.6

12.9 11.5

0.0 0.0

100 100

1995 1996

3.4 3.7

4 6.3

16.7 12.3

15.1 15.2

13.3 13.8

8.8 6.3

9.1 9.3

14.3 13.4

12.5 12.5

2.8 7.2

100 100

1997 1998

2.6 2.1

7.6 8

11.3 8.5

15.2 15

15.8 16.6

5.9 5.8

8.9 9.6

12.7 13.7

13.5 13.3

6.7 7.4

100 100

1999

2.2

7.5

12.1

13.2

16.9

6.6

8.8

13.3

13.6

5.8

100

FYROM ROM SLOV TURK

YU


Notes: (*) The figures refer to the united former Yugoslavia

If it is taken into account that the newly emerged states of the region account for something below then 50.0 percent of the intra-regional trade and that at least 80.0 percent of this share represents trade among these countries a rather safe conclusion may be drawn that the increase in the intra-regional component of the total regional trade observed above is the outcome of trade created among the countries of the former Yugoslavia rather than of a region wide tendency towards closer regional integration. The region of South-Eastern Europe runs increasingly negative international trade balances. The region’s trade deficit increased more than three times between 1987 and 1999. The trade deficit between the region and the EU increased even faster in the same period (see Table 7). The deficit of the bilateral trade with the EU accounted for above 60.0 percent of the region’s total deficit in 1999 as opposed to only 36.0 percent in 1987.

8

Only FYROM has a lower percentage ranging from 43.0 percent in 1993 to 66.5 percent in 1998. The case of the Republic of Yugoslavia is not comparable given the ethnic disputes this country has been involved with its neighbouring countries.

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Table 7. Balance of SE European Trade by Region of Direction, in absolute and percentage terms EU

WORLD-R % 36.6 49.2

USD Millions -7568 -4453

WORLD-T %

EU

WORLD-R WORLD-T

1987 1988


62.2 50.6


%

1987=100

100 100

100 97.2

100 58.8

100 72.4

1989 1990

-5656 -13244

37.7 41.8

-9269 -18184

61.8 57.4

-15000 -31694

100 100

126.9 297.1

122.5 240.3

123.3 260.5

1991 1992

-10144 -12753

43.9 46.2

-12841 -14809

55.5 53.7

-23130 -27597

100 100

227.5 286.1

169.7 195.7

190.1 226.9

1993 1994

-15660 -14082

50.9 63.3

-15509 -8383

50.4 37.7

-30770 -22239

100 100

351.3 315.9

204.9 110.8

252.9 182.8

1995 1996

-22038 -28901

59 61.9

-16097 -18772

43.1 40.2

-37356 -46710

100 100

494.3 648.3

212.7 248

307.1 384

1997 1998

-31215 -30810

62.4 62.3

-19511 -19286

39 39

-50026 -49485

100 100

700.2 691.1

257.8 254.8

411.2 406.8

1999

-25175

60.6

-16917

40.7

-41545

100

564.7

223.5

341.5


Table 8. The Intra-regional Trade of the Newly Emerged Countries in South-Eastern Europe by Area of Direction, in percentage terms BosniaHerzegovina

Croatia

FYROM

Slovenia

FR Yugoslavia

TOTAL

(1)

(2)

(1)

(2)

(1)

(2)

(1)

(2)

(1)

(2)

(1)

(2)

1993

84.0

16.0

98.4

1.6

42.9

57.1

89.6

10.4

-

-

84.5

15.5

1994

98.9

1.1

94.6

5.4

32.6

67.4

92.2

7.8

-

-

81.4

18.6

1995

98.6

1.4

94.1

5.9

42.4

57.6

90.5

9.5

0.0

100.0

81.7

18.3

1996

96.8

3.2

94.6

5.4

62.2

37.8

92.1

7.9

0.0

100.0

79.7

20.3

1997

95.0

5.0

93.4

6.6

62.3

37.7

90.5

9.5

0.0

100.0

80.2

19.8

1998 1999

93.2 96.2

6.8 3.8

95.1 93.7

4.9 6.3

66.5 62.6

33.5 37.4

86.4 85.1

13.6 14.9

25.3 26.8

74.7 73.2

81.4 81.7

18.6 18.3

Source: IMF, Direction of Trade Statistics. Own calculations Notes: (1) Countries of former Yugoslavia (2) Other South Eastern European Countries

Explaining the Present State of Regional Integration in South-Eastern Europe The poor performance of South-Eastern Europe with respect to regional integration reflects the current capacities and trade policies, as well as other factors, such as political and ethnic conflicts, uneven progress in reforming and restructuring the economy, etc. One may envisage some demand side limitations on the expansion rate of intra-regional trade. South-Eastern Europe has a low level of population of about 130 million, of which, Turkey alone accounts for 63 million. Turkey is the only country that may be compared to the average population size of the main European Union countries, while the average size of the rest South-Eeastern European countries is around 8 million people. Per capita incomes of the countries in the region are well below the more advanced EU countries ranging in 1998 from USD 13,400 or the 60 percent of Germany or France, in purchasing power parity (PPP) terms, for Greece, which is considered as the most economically advanced country in the region, to USD 1,490 or almost the 7 percent of Germany or France for Albania, which is considered as the most economically backward country in the region9 . GDP growth rates are also low or even negative – see Table 1. These factors undermine substantially the demand stimulus, either existing or potential for 9

Figures adopted from World Bank, 1999.

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international trade and to the extent that the EU provides a better market, in terms of size, exports from the region would tend to be directed to the EU market rather than to the regional one. Trade policies may also affect the intra-regional level of trade. Trade policies vary considerably among the countries in the region. Nevertheless, they are characterised by significant levels of protection, differentiated tariff structures that result to high effective protection rates (see Michalopoulos, 1999), and differing levels of access for differing trading partners. The majority of countries, especially the poorest lacks both efficient institutions regulating and promoting trade, such as customs services, agencies providing trade finance guarantees, state organisations able to design and implement trade policies, etc., and physical infrastructure, e.g. ports, roads, railways, depots, etc. that facilitate international trade 10 , while their tax revenues rely heavily on customs revenues11 . Existing barriers to trade, along with bilateral preferences12 ration intra-regional trade; distort its patterns and divert it towards other areas, e.g. the EU with whom individual countries in the region have rather more rationalised and free trade relationships 13 . The establishment of a regional free trade zone and the improvement of existing trade policies and trade related institutional would benefit intraregional trade. At present, production structures in South-Eastern European countries tend to specialise in low- tomedium technology sectors taking advantage of a relatively cheap but adequately trained labour force. This tendency is quite distinct from the tendency of the main EU countries to concentrate in high technology high skilled labour sectors (see Petrakos and Totev, 2001), and it favours the development of inter-industry international trade between the two areas. Countries of similar production specialisation tend to establish a rather intra-industry type of international trade taking advantage of similar but widely varied demand preferences, which are formed on the basis of differentiated needs, high income and low price elasticity of demand (see Kyrkilis and Nikolaidis, 1998). To a significant extent products of that type are human skill and technology intensive. Given that most of the countries in the region are far away from able to produce that type of products the expectation is that the volume of the regional intra-industry trade would be low. At the same time given the overlapping production structures and the more or less common comparative advantages of the countries there is no much scope for big volumes of inter-industry trade within the region. One would expect that as production structures and comparative advantages would differentiate the volume of regional international trade would also increase. Success in transition is relatively low in the region (see EBRD, 2000) and that affects negatively the performance of individual countries in terms of trade integration. Slow progress in macroeconomic stabilisation and market reforms has failed to create a favourable environment for business investment 10

For a rather detailed examination of South Eastern European trade policies and institutions see Trade and Development Institute, 1999. 11 In the transition countries of the region taxes on international trade accounted for about 3.0 percent of GDP for each year in 1998 and 1999. In Bosnia- Herzegovina and FYROM they account for 10.0 percent and 4.0 percent of GDP respectively (see World Bank, 2000). The establishment of alternative revenue sources should accompany any further trade liberalization. 12 Croatia has a free trade agreement with Slovenia and FYROM; the latter with Bulgaria and Slovenia; and the Federal Republic of Yugoslavia with FYROM. The structure of these agreements is unclear and complicated involving different sets of preferences over different periods with varied product coverage and unclear long-term objectives for each of the different countries involved. 13 With the exception of Greece that is a full member of the euro-zone, the EU has established a variety of bilateral trade relationships with South Eastern European countries. For Bulgaria and Romania the existing ‘Europe Agreements’ aim at establishing a free trade area and foresee a gradual liberalisation of trade restrictions by both parties. In the case of other countries, the EU provides a wide-ranging unilateral trade preferences characterised by a more favourable treatment of industry than agriculture and the application of tariffs on exports of certain ‘sensitive’ products when quotas are exceeded. For a detailed analysis see European Commission, 1999.

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both domestic and foreign14 , which would have advanced the supply capacity, and hence it would have promoted both exports and the import absorption intensity of the countries in the region. An equally negative factor is the political and ethnic frictions between and within countries in the region that have distorted trade relationships between neighbouring countries. To the extent that the business climate would improve the volume of regional cross border trade would also increase. Besides, the development of regional infrastructure that facilitates communication and transportation, therefore it lowers transportation costs and makes market access easier, would also improve the intra-regional trade component of the South-Eastern European international trade.

Conclusion Regional trade integration in South-Eastern Europe has been progressing at a very slow pace in the 1990’s as opposed to trade relation with the EU, which is the main trading partner for the region. A number of constraints such as poor performance in the transition process, not comprehensive trade policies and institutions, low levels of development, and ethnic and political disputes may be attributed as the main causes for this failure.

References EBRD (2000) Transition Report, London: European Bank of Reconstruction and Development. European Commission (1999) “Trade Relations between the European Community and South-Eastern Europe”, Discussion paper, Economic Working Table, October 8, 1999. Gros, D. (1999) An Economic System for the Post War South-Eastern Europe, CEPS, May. Kyrkilis, D. and Nikolaidis, E. (1998) “Trade Flows between Greece and Central Eastern Europe: Inter-industry vs. Intra-industry Trade”, Review of Economics and Business, Vol. XLV, No 1, March 1998. Michalopoulos, C. (1999) “Trade Policy and Market Access Issues for Developing Countries”, World Bank Policy Research Working Paper, No 2214, October. Petrakos, G. and Totev, S. (2001) “Economic Performance and Structure in the Balkan Region” in G. Petrakos and S. Totev (eds) The Development of the Balkan Region, London: Ashgate. Trade Development Institute (1999) Study on Trade Policy in South-Eastern Europe, September. World Bank (1999) World Development Indicators, Washington DC. World Bank (2000) The Road to Stability and Prosperity in South-Eastern Europe, A Regional Strategy, Paper.

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The ratio of gross investment to GDP in the transition countries of South Eastern Europe, with the exception of Slovenia, has fallen from 23.0 percent in 1992 to 18.3 percent in 1999. At the same time, productivity in 1998 stood at about the 90.0 percent of its level in 1989 (see World Bank, 2000).

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